No Irish aid for Portugal
As Ireland is already locked into a bailout of its own, it will not be asked to help fund the attempted resolution to the latest financial crisis to hit the eurozone, the Department of Finance confirmed.
Ireland did put money into the Greek bailout, but that was before Dublin was forced into accepting €85 billion from the EU/IMF.
Finance ministers, gathering in Budapest last night for a two-day informal meeting, will now be thrown into emergency session in an effort to get Portugal an estimated €75bn in aid as quickly as possible.
Irish politicians hope that the negotiations will help cut the cost of Ireland’s €67bn loan since Portugal will almost certainly avail of the new lower interest rate agreed by EU leaders and due to come into force in June.
Tánaiste Eamon Gilmore told the Dáil, “The situation in Portugal and its application are of considerable relevance to our position. They underline again the extent to which the problem has a European dimension”.
However, organising a bailout for Portugal may not be that easy because the minority socialist government resigned last month and Finland, due to hold elections next week, is reluctant to take any decisions just now.
But the country urgently needs money and the finance ministers are expected to push very hard to put together a package. An EU source said that the proposed austerity programme formed a good basis for a deal — and the centrist opposition said they would abide by it.
The country looked as though it might avoid the same fate as Ireland and Greece with its minority government attempting to rush through one of the harshest austerity budgets in the EU last month.
However, when the budget was voted down Prime Minister Jose Socrates called a general election. The rating agencies forced the pace and downgraded the country’s credit rating and pushed up the price the country had to pay on the open markets for one year money during the week.
The Bank of Portugal has warned a double-dip recession is likely this year and the banks announced earlier this week they would no longer buy sovereign bonds and urged the government to apply to the EU for bridging of up to €20bn.
But with the country effectively locked out of the markets and needing €9bn to pay off bonds in April and June alone, and banks cut off from the interbank market, a full bailout was inevitable.
European Central Bank president, Jean Claude Trichet, encouraged Portugal to take a loan amid fears that the problems may spread to Spain. Spain’s exposure to Portugal’s banks is €62.2bn, although this is half that of what Britain’s banks was to Ireland at the start of the crisis.
Unlike Ireland’s crisis, Portugal’s banks were reasonably healthy, but the country’s public and private debt, combined with stagnant growth for some years, pushed the country closer to the edge.
This was compounded by the revised budget deficit for last year of 8.6%, higher than the 7.3% forecast after a change in accounting practices added more than €2bn.
Despite the centrist opposition party agreeing with the austerity budget, they voted against it as they disagreed with the way some elements were to be applied.
The bailout money is expected to come like Ireland’s from the Commission’s European Stability Fund, the EU’s European Financial Stability Mechanism and from the IMF.
The sum of between €70bn and €80bn being talked about for Portugal would be roughly equivalent to 45% of its GDP and is similar in size to the loans given to Ireland and Greece. They need an estimated €25 billion to cover their public deficit to mid-2014 and an additional €35bn to redeem government bonds.
Like Ireland they will be hoping to secure an ECB commitment to provide liquidity to their banks until they can return to the markets and borrow at sustainable rates.
Finance Minister Michael Noonan will brief his colleagues on the Irish banks’ stress tests results and the consequent restructuring and recapitalisation, using funds from the Pension Reserve Fund and his plans to have junior bondholders share the burden.
It is not clear if he will raise the issue of the interest rate cut with them, although with the positive reaction of the markets to the bank restructuring he may do so. But he wants to avoid France or any other country demanding an increase in the country’s corporation tax rate in return.
Ireland’s interest rate will be cut automatically after June when national parliaments approve the new interest rates for loans from the EFSF.
Yesterday’s 0.25% ECB interest rate increase will also push up the interest rate on the country’s bailout.
